Simple but not easy. The role of a professional financial adviser.

Ultimately much of the role of a professional financial adviser is, in fact, relatively simple financial education.

The fact is that many clients need to be educated about various aspects of finance.  Examples include the advantages of putting insurance policies including critical illness or income protection in place, if not already available through an employer or elsewhere, or  the differences between ISAs and pensions.  When you invest money into a pension, you receive tax relief but the income (ignoring the pension commencement lump sum) is taxable.  With ISAs, there is no initial tax relief but any monies withdrawn or paid out from an ISA are income and capital gains tax free.  The “cost” of the initial tax relief for pensions is   the limit on access until age 55 while there is no restriction on access to ISAs (unless stipulated by the underlying investments selected for inclusion in the ISA).

At the same time, the benefits of financial concepts such as compounding and pound cost averaging can be a revelation to many. Famously  (at least in the world of finance), Albert Einstein said :  “Compound interest is the eighth wonder of the world.  He, who understands it, earns it … he who doesn’t … pays it.”

Which really highlights the fact that an important role for a professional financial adviser is one of ensuring that individuals know their budgets, avoid or repay debt if possible and put appropriate savings and other plans in place at as early a stage as possible?

As I have said, all of the above is relatively simple but where things get a little more tricky is when determining a client’s risk profile and capacity for loss and matching this to an appropriate asset allocation. Then there is the need to populate  that asset allocation from the thousands of opportunities available and all the while, doing this in as tax efficient a manner as possible.

For an investor, or adviser, asset allocation is the process of determining optimal allocations for the broad categories of assets (such as equities, fixed interest, cash, property and alternatives) that suit an individual’s investment time horizon and risk tolerance.  Various studies have shown that this allocation is probably the most important investment decision and may account for more than eighty per cent of the return of a portfolio.  This is because each asset class will generally have different levels of return and risk.  They also behave differently.  At the time one asset is increasing in value, another may be decreasing or not increasing as much and vice versa.  This leads to the concept of an “efficient portfolio”.

An efficient portfolio is one that has the smallest attainable portfolio risk for a given level of expected return (or the largest expected return for a given level of risk).  Optimal asset allocation is unlikely to be attained from one asset class.


For an investor, or adviser, there is also the question of portfolio construction.  Portfolio construction is important in determining whether, for example, a group of funds together give a total underlying portfolio  so diverse that the portfolio is no more than a glorified tracker. This  involves analysing the overlap of assets within the individual funds.

If an adviser, or investor, could predict which asset classes would do best in any specific  period, there would be no need for asset allocation.  Such a “guru” would, for example, move into equities when they are  about to provide a 20% return, and move into cash when equities are headed for a fall.  Of course, investors with an endless amount of time before they need their money do not have much need for asset allocation either.  They could  just put everything into the asset class with the highest average returns over the long term and ride out the volatility.

However, asset allocation is essential for those advisers and clients who are not psychic, who need money in the foreseeable future and who are prone to do silly things if values suddenly fall too fast.  By balancing the types of assets among equities, bonds, property, alternatives and cash, an investor trades “the best” returns they  would get if they timed the markets perfectly for greater predictability and the peace of mind in knowing that the investment they hold is aiming to match their risk tolerance and capacity for loss.

Ultimately, as I have entitled this article, for me professional financial advice is potentially simple, but not necessarily so and  is definitely worth seeking out?

Andy Gadd – 27th July 2017